The New Tax Law, C-Corporations, 401k’s, and Your Business

Got a headhunter out looking for staff. I desperately need to hire & train people. Too few hours in the day for me to do it all. Those of you who have built an organization feel the pain and know the reasons. Stay tuned.

I recently nailed it big-time for a client. He flips a lot of houses…. hundreds per year. In this case, “flip” means take title, rehab, and sell and not “assign a contract or option”.

Given this client’s volume, he is personally in the highest federal income tax bracket of 37%. He happened to be a good candidate for running a chunk of that business via a Roth 401k.

Specifically, he has help. Makes sense, with that kind of volume, he cannot do it all himself (as I am re-learning!). Some of that help now works exclusively for a C-Corporation owned 100% by his Roth 401k. The client most emphatically does not work for the C-Corporation or for the 401k. In short, his Roth 401k owns an active & ongoing business.

Think it through.

Instead of paying 37% (the way he was), those flips are now taxed at the 21% corporate rate (thank you new tax law!). So, for example, if $500k of flip income that would have been outside the 401k/C-Corp is moved into that structure, the federal income tax savings equal $80,000 in year one (16% difference in rates multiplied by $500k net income).

It gets better. The flip income can be recycled into more flips taxable at 21%. Or the income can be distributed (tax-free, no “2nd level of tax” on most C-Corps that issue dividends to Roth 401k’s) into the Roth 401k and invested in passive investments such as rentals and notes…. tax-free. And the tax-free income can be distributed to its owner tax-free. For two generations.

$80k in tax savings in year one (and year two, and year three, and so on) and with $395,000 (after federal income tax & before state income tax) now inside of a Roth account for lots more tax-free income.

Of course, there are a myriad of details that took me 23+ years to learn. Miss just one of them and the structure may well go SPLAT at great expense.

I’d be happy to tell you exactly how to do all of this without my help if you would just buy me lunch to pick my brain. Not. Stop asking, I will just be rude(r).

Instead, if you pay for just two or three hours of my time, I’ll happily explain “how to” in great detail and train your tax person to compete with me. Just kidding.

I charge a low 5-figure sum to set this up the right way. Using the numbers above, it’d pay for itself in less than four months.

Too expensive?

Keep paying 37% in taxes. That is expensive. Or have a CPA or attorney who hasn’t my experience taking self-directed retirement accounts to Tax Court try and reverse engineer this little article to “save” some money. As long as they catch every detail it’ll work out just fine……

Sorry for the rant. I just get tired of real estate investors constantly trying to haggle with me. I don’t haggle. I did not lose my job, am not in foreclosure, and am not getting divorced. In short, I am not motivated and feel no pressure to give away what I spent a lifetime learning. We probably have that in common. You don’t give away houses at cost. Because learning to buy low took you time & money (and probably lots of pain) to learn. Same for me.

I do research the heck out of things, invest in RE myself (so I have a good idea of what you are dealing with), visit the Tax Court in DC to pull detailed (and expensive) records (i.e. – IRS attorneys’ briefs, copies of their cross examination of taxpayers in court, etc.) that most attorneys & CPA’s never bother with, join organizations that talk to regulators, and so forth. I have also taken self-directed retirement plan cases to Tax Court and won. In short, I do a ton of homework. The result? Excellent planning. Lots of taxes saved with a high chance of success if audited (nothing is ever 100%, sorry). And like you, I charge for my knowledge.

Let me know if you are interested.

This was of course just one example of superior planning. There are more planning techniques, most of them not nearly this expensive (or powerful, there’s a correlation).

PS: For those who purchased the 8-hour webinar on the new tax law that I co-presented with Dyches Boddiford, I predicted this sort of planning device. See the slides that are entitled “The Death of UBIT” in the “New C-Corporation Tax Rate”.

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